Proposed disclosure rule change ‘essential’ for EU Taxonomy to remain useful for investors: market reacts to plans to classify nuclear and gas as green

The European Commission confirmed in its recent announcement setting out plans to label nuclear and some natural gas activities as green in the EU Taxonomy framework that it will also amend related disclosure requirements – likely to create welcome transparency for investors, industry participants told RI.  

On New Year’s Eve, the Commission sent a draft legal text to member states as well as members of the EU Platform on Sustainable Finance, a 57-strong group of advisors including financial market players, academics and NGOs, with details on how it plans to classify nuclear and natural gas activities in the EU Taxonomy. The stakeholders have until 12 January to submit their views on the long-awaited act, setting out thresholds and criteria for what will count as climate-aligned in the Taxonomy, specifically with regards to nuclear and gas activities. The Commission plans to adopt the act this month, and it will then be scrutinised by the European Parliament and Council of member states – where it can be vetoed – before it is implemented.   

Both controversial sectors were given the go-ahead to be classified as Taxonomy-aligned in the draft text “under clear and tight conditions” and as so-called ‘transitional’ activities. The transitional category in the EU Taxonomy was originally created for sectors without green alternatives, such as steel and cement.  

Under current rules, companies and financial institutions required to report their Taxonomy alignment under the Taxonomy Disclosures Delegated Act (also known as 'Article 8' of the Taxonomy Regulation) have to disclose whether their Taxonomy-aligned activities fall into the the transitional and enabling categories rather than purely green – but they do not have to provide details on specific sectors. But the Commission said on 1 January that “to ensure transparency”, it will amend the Taxonomy disclosure rules “so that investors can identify if activities include gas or nuclear activities, and to what extent, so they can make an informed choice”. The draft text says updated disclosure rules will provide “for specific disclosure requirements for natural gas and nuclear energy sectors”.

The text adds that the information should “be presented in the form of a template that indicates clearly the proportion of gas and nuclear energy activities in the denominator of key performance indicators of those undertakings” and that it will “amend or propose to amend the disclosure framework pertaining to those financial products as appropriate to provide for full transparency over the whole life of those financial products”.  

Philippe Zaouati, CEO of Mirova, told RI: “The text actually requires transparency on the share of gas and nuclear power. […] This clearly shows that the Commission has understood that this is essential for the taxonomy to remain a usable tool for investors.”  

“In fact, this creates a two-speed taxonomy […] with a ‘political’ taxonomy and a ‘practical’ taxonomy,” he added. “We will ask our data providers for these figures and on our side we will only use the figure without gas and nuclear.” 

Christoph Klein, Managing Partner at Frankfurt-based fixed income investor ESG Portfolio Management, told RI that while he is “most unhappy” about the planned inclusion of nuclear and natural gas in the taxonomy, “transparency is super important here” and that he would like disclosures to cover exposure to nuclear and gas.  

The planned change in disclosure rules under the Taxonomy framework comes just days after the 1 January deadline for a separate set of Taxonomy-related disclosure rules, where investors covered by the EU’s Sustainable Finance Disclosure Regulation (SFDR) had to report their products' Taxonomy alignment for the first time.  

While these rules are separate, the proposed changes to the Taxonomy climate delegated act to cover nuclear and gas activities will likely "flow through into the SFDR disclosures for products", said Daniel Nevzat, Regulatory Affairs Advisor at Norton Rose Fulbright. He explained most investors have undertaken initial assessments on their Taxonomy alignment while some have conducted full assessments. If the latest delegated act is implemented and nuclear and gas activities are also Taxonomy-aligned, in future, “they’ll need to go through their assets again where there are nuclear and gas activities,” he said, adding the extra compliance burden might not be welcome by some.  

This follows a warning from Europe’s sustainable finance industry association Eurosif in November, saying that including gas and nuclear in the Taxonomy will undermine confidence in SFDR disclosures unless it is easy to tell the difference between a fund with 5% alignment composed of renewables and one with 5% alignment from natural gas and nuclear assets. 

Nevzat said the changes to some funds’ Taxonomy-alignment could be significant with the inclusion of gas and nuclear. “Say you have an equity fund with an investment in an oil and gas company that is taking steps to transition to renewables assets – this investment could have a Taxonomy-alignment say of 10%. But then if natural gas is included, the taxonomy-alignment could suddenly jump to say 30%. Those kinds of assessments might be made and it might look quite favourable from a manager’s perspective.”